Tuesday, February 7, 2017

Superstar companies

Following are comments to and excerpts from articles published in The Economist's Special Report "Companies" on September 17th, 2016.

The first article in this report "The rise of the superstars" explains what a superstar is, why today it has started to matter again and the age of entrepreneurism is at an end. I have rather an orthogonal viewpoint as an entrepreneur can find value creation opportunities in any economic circumstance.

The article starts and ends with the age old question asked since Roman times and superbly articulated by President Theodore Rosvelt:

"On August 31st 1910 Theodore Roosevelt delivered a fiery speech in Osawatomie, Kansas. The former president celebrated America’s extraordinary new commercial power but also gave warning that America’s industrial economy had been taken over by a handful of corporate giants that were generating unparalleled wealth for a small number of people and exercising growing control over American politics. Roosevelt cautioned that a country founded on the principle of equality of opportunity was in danger of becoming a land of corporate privilege, and pledged to do whatever he could to bring the new giants under control."

Though his aspirations may not have found culmination:

"But now size seems to matter again. The McKinsey Global Institute, the consultancy’s research arm, calculates that 10% of the world’s public companies generate 80% of all profits. Firms with more than $1 billion in annual revenue account for nearly 60% of total global revenues and 65% of market capitalisation."

This is both positive and negative:

"The number of listed companies in America nearly halved between 1997 and 2013, from 6,797 to 3,485, according to Gustavo Grullon of Rice University and two colleagues, reflecting the trend towards consolidation and growing size. Sales by the median listed public company are almost three times as big as they were 20 years ago. Profit margins have increased in direct proportion to the concentration of the market."

Positive because this is unsustainable for innovation - large companies do not deliver breakthrough innovation - their purpose is to be incrementalists - and the consumer and commercial markets have leaps in growth only when disruptions come along. Unfortunately, this trend's negativity squarely hits the entrepreneur head on:

"Startups, meanwhile, have found it harder to get off the ground. Robert Litan, of the Council on Foreign Relations, and Ian Hathaway, of the Brookings Institution, note that the number of startups is lower than at any time since the late 1970s, and that more companies die than are born, pushing up their average age."

The article quotes Mr. Peter Thiel, "Competition is for losers." Read Mr. Thiel's article in the Wall Street Journal here in which he elaborates on the concept of, "If you want to create and capture lasting value, look to build a monopoly." Interesting fact that "In a list of the world’s top 100 companies by market capitalisation compiled by PwC, an accountancy firm, the number of continental European firms has declined from 19 in 2009 to 17 now. Still, in most of the world some consolidation is the rule. The OECD, a club of mostly rich countries, notes that firms with more than 250 employees account for the biggest share of value added in every country it monitors."

The conclusion in the article is stark and perhaps has opportunities for the astute capitalist entrepreneur who knows that the multinationals growth has nothing to do with innovating but with the application of innovation and he or she can deliver it for them, "There are good reasons for thinking that the superstar effect will gather strength. Big and powerful companies force their rivals to bulk up in order to compete with them. They also oblige large numbers of lawyers, consultancies and other professional-services firms to become global to supply their needs. Digitisation reinforces the trend because digital companies can exploit network effects and operate across borders."

Silicon Valley continues to grow its superstars via M&A. It is fascinating to see how many small and entrepreneurial companies are being bought by the likes of Intel, Cisco, Facebook, Google, Oracle, etc. Though I find it rather interesting that Amazon continues to grow its own ideas starting from within the corporation!